SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6817
Lehman Brothers Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-2518466
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
3 World Financial Center
New York, New York 10285
(Address of principal Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
The Registrant meets the conditions set forth in General Instructions H 1 (a)
and (b) of Form 10-Q and therefore is filing this form with the reduced
disclosure format contemplated thereby.
As of July 12, 1996 1,006 shares of the Registrant's Common Stock, par value
$.10 per share, were issued and outstanding.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 1996
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Six Months Ended May 31, 1996
and 1995 ......................................... 3
Consolidated Statement of Financial Condition -
May 31, 1996 and November 30, 1995 ................... 5
Consolidated Statement of Cash Flows -
Six Months Ended May 31, 1996
and 1995 ...................................... 7
Notes to Consolidated Financial Statements........ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ............................... 26
Item 6. Exhibits and Reports on Form 8-K .................... 27
Signatures........................................................ 28
EXHIBIT INDEX ...................................................... 29
Exhibits
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
Three months ended
May 31, May 31,
1996 1995
------------- -----------
Revenues
Principal transactions $ 287 $ 182
Investment banking 182 112
Commissions 77 107
Interest and dividends 2,555 2,576
Other 6 14
------ -------
Total revenues 3,107 2,991
Interest expense 2,492 2,504
----- -----
Net revenues 615 487
------ -----
Non-interest expenses
Compensation and benefits 303 267
Brokerage, commissions and clearance fees 52 48
Communications 24 31
Professional services 21 19
Business development 18 21
Occupancy and equipment 17 21
Depreciation and amortization 13 16
Management fees 20 48
Other 52 28
------- -------
Total non-interest expenses 520 499
------ ------
Income before taxes 95 (12)
Provision for (benefit from) income taxes 40 (12)
------- ------
Net income $ 55 $ 0
==== =======
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
Six months ended
May 31, May 31,
1996 1995
------------ ---------
Revenues
Principal transactions $ 586 $ 339
Investment banking 334 221
Commissions 158 200
Interest and dividends 5,083 4,989
Other 14 22
------- -------
Total revenues 6,175 5,771
Interest expense 4,953 4,833
----- -----
Net revenues 1,222 938
----- ------
Non-interest expenses
Compensation and benefits 617 447
Brokerage, commissions and clearance fees 99 99
Communications 50 64
Professional services 38 44
Business development 38 43
Occupancy and equipment 37 44
Depreciation and amortization 27 33
Management fees 44 100
Other 99 74
------- ------
Total non-interest expenses 1,049 948
----- -----
Income before taxes 173 (10)
Provision for (benefit from) income taxes 73 (15)
------- ------
Net income $ 100 $ 5
========== =======
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
May 31, November 30,
1996 1995
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 250 $ 287
Cash and securities segregated and on deposit
for regulatory and other purposes ............................................ 530 785
Securities and other financial instruments owned:
Governments and agencies ................................................... 16,824 14,038
Corporate obligations and other contractual commitments .................... 7,261 8,115
Certificates of deposit and other money market instruments ................. 3,331 2,958
Mortgages and mortgage-backed .............................................. 2,105 3,182
Corporate stocks and options ............................................... 1,859 2,856
------- -------
31,380 31,149
------- -------
Collateralized short-term agreements:
Securities purchased under agreements to resell ............................ 32,104 25,982
Securities borrowed ........................................................ 19,290 16,562
Receivables:
Brokers, dealers and clearing organizations ................................ 3,409 2,719
Customers .................................................................. 4,437 2,219
Others ..................................................................... 6,691 2,175
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $480 in 1996 and $455 in 1995) ............................................ 307 333
Deferred expenses and other assets ............................................. 185 219
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $90 in 1996
and $86 in 1995) ............................................................. 170 174
------- -------
$98,753 $82,604
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
May 31, November 30,
1996 1995
---- ----
<S> <C> <C>
Commercial paper and short-term debt ........................................... $ 4,776 $ 1,008
Securities and other financial instruments sold but not yet purchased:
Governments and agencies .................................................... 6,647 6,477
Corporate obligations and other contractual commitments ..................... 3,389 3,403
Corporate stocks and options ................................................ 1,484 1,195
-------- --------
11,520 11,075
-------- --------
Collateralized short-term financings:
Securities sold under agreements to repurchase ............................ 51,833 41,900
Securities loaned ......................................................... 6,473 2,649
Advances from Holdings and other affiliates .................................... 7,374 8,418
Payables:
Brokers, dealers and clearing organizations ................................ 3,486 4,467
Customers .................................................................. 5,445 5,733
Accrued liabilities and other payables ......................................... 1,975 1,829
Long-term debt:
Senior notes ............................................................... 272 420
Subordinated indebtedness .................................................. 3,594 3,077
-------- --------
Total liabilities .................................................... 96,748 80,576
-------- --------
Commitments and contingencies
Stockholder's equity:
Preferred stock, $.10 par value; 10,000 shares authorized;
none outstanding
Common stock, $.10 par value; 10,000 shares authorized; 1,006 shares issued
and outstanding in 1996 and 1995
Additional paid-in capital ................................................ 2,230 2,353
Foreign currency translation adjustment ................................... 3 3
Accumulated deficit ....................................................... (228) (328)
-------- --------
Total stockholder's equity ........................................... 2,005 2,028
-------- --------
Total liabilities and stockholder's equity ........................... $ 98,753 $ 82,604
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
Six months ended
May 31, May 31,
1996 1995
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................$ 100 $ 5
Adjustments to reconcile income to net cash (used in)
provided by operating activities:
Depreciation and amortization ......................... 27 33
Provisions for losses and other reserves .............. 21 15
Other adjustments ..................................... 11 8
Net change in:
Cash and securities segregated ........................ 255 509
Receivables from brokers, dealers and clearing
organizations ...................................... (690) 455
Receivables from customers ............................ (2,218) (1,554)
Securities purchased under agreements to resell ....... (6,122) 269
Securities borrowed ................................... (2,728) (10,644)
Securities and other financial instruments owned ...... (231) 2,196
Payables to brokers, dealers and clearing organizations (981) 1,837
Payables to customers ................................. (288) 2,683
Accrued liabilities and other payables ................ 116 (223)
Securities sold under agreements to repurchase ........ 9,933 (641)
Securities loaned ..................................... 3,824 5,940
Securities and other financial instruments sold but
not yet purchased ................................. 445 155
Other operating assets and liabilities, net ........... (4,477) 796
-------- --------
Net cash (used in) provided by operating activities .....$ (3,003)$ 1,839
======== --------
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
(Unaudited)
(In millions)
Six months ended
May 31, May 31,
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes $ (146) $ (90)
Proceeds from issuance of subordinated indebtedness 775
Principal payments of subordinated indebtedness (261) (63)
Net proceeds from (payments for) commercial paper and 3,768 (671)
short-term debt
Decrease in advances from Holdings
and other affiliates (1,044) (709)
Dividends and capital distributions paid (123) (212)
------- ------
Net cash provided by (used in) financing activities 2,969 (1,745)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements (3) (11)
-------- ------
Net cash used in investing activities (3) (11)
-------- ------
Net change in cash and cash equivalents (37) 83
------- -------
Cash and cash equivalents, beginning of period 287 361
------- ------
Cash and cash equivalents, end of period $ 250 $ 444
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $4,883 and $4,863 for the six months ended
May 31, 1996 and 1995, respectively. Income taxes paid totaled $17 and $4 for
the six months ended May 31, 1996 and 1995, respectively.
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The consolidated financial statements include the accounts of Lehman
Brothers Inc., a registered broker-dealer ("LBI") and subsidiaries (LBI together
with its subsidiaries, the "Company"). LBI is a wholly owned subsidiary of
Lehman Brothers Holdings Inc. ("Holdings"). LBI is one of the leading global
investment banks serving institutional, corporate, government and high-net-worth
individual clients and customers. The Company's worldwide headquarters in New
York are complemented by offices in additional locations in North America,
Europe, the Middle East, Latin and South America and the Asia Pacific region.
Holdings provides investment banking and capital markets services in Europe and
Asia. The Company is engaged primarily in providing financial services. The
Company also operates a commodities trading and sales operation in London. All
material intercompany accounts and transactions have been eliminated in
consolidation. The Company's financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC") with respect to the Form 10-Q and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. Pursuant to
such rules and regulations, certain footnote disclosures which are normally
required under generally accepted accounting principles have been omitted. The
Consolidated Statement of Financial Condition at November 30, 1995 was derived
from the audited financial statements. It is recommended that these financial
statements be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the twelve
months ended November 30, 1995 (the "Form 10-K").
The nature of the Company's business is such that the results of any
interim period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain amounts
reflect reclassifications to conform to the current period's presentation.
2. Borrowings:
During the six months ended May 31, 1996, the Company issued $775
million of fixed-rate subordinated indebtedness with maturities ranging from
2001 to 2006. These issuances have been effectively converted to floating rate
obligations, based on the London Interbank Offered Rates ("LIBOR") through the
use of interest rate swaps. In addition, $407 million of long-term debt matured
during the six months ended May 31, 1996.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At May 31, 1996, LBI's regulatory net capital,
as defined, of $1,746 million exceeded the minimum requirement by $1,621
million. The Company's triple-A rated derivatives subsidiary, Lehman Brothers
Financial Products Inc., has established certain capital and operating
restrictions which are reviewed by various rating agencies.
Repayment of subordinated indebtedness and certain advances and
dividend payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain instruments governing the indebtedness
of LBI contractually limit its ability to pay dividends.
<PAGE>
4. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risks resulting from its trading activities in cash instruments (collectively,
"Trading Related Derivative Activities"). For a further discussion of the
Company's derivative related activities, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Off-Balance Sheet
Financial Instruments and Derivatives" and Note 13 to the Consolidated Financial
Statements, included in the Form 10-K.
Trading-Related Derivative Activities
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized in
principal transactions in the Consolidated Statement of Operations. The Company
records unrealized gains and losses on derivative contracts on a net basis in
the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement.
Listed in the following table is the fair value and average fair value of the
Company's Trading Related Derivative Activities (in millions):
Average Fair
Value*
Fair Value* Six Months Ended
May 31, 1996 May 31, 1996
------------ ------------
Assets Liabil- Assets Liabil-
ities ities
- - -----------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) ........$3,388 $1,530 $3,098 $1,673
Foreign exchange forward contracts and options ... 781 1,510 707 1,513
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options ................................. 251 229 255 227
Equity contracts (including equity swaps, warrants
and options) ................................ 32 24 60 43
Commodity Contracts (including swaps, forwards,
and options) ................................ 45 50 39 50
--------------------------
Total ............................................$4,497 $3,343 $4,159 $3,506
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded futures contracts.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average Fair Value*
Twelve Months
Fair Value* Ended
November 30, November 30,
1995 1995
----------------- -----------------
Assets Liabi- Assets Liabi-
lities lities
- - --------------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) ........$2,672 $2,248 2,692 $2,060
Foreign exchange forward contracts and options ... 893 1,171 1,173 1,226
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options ................................. 188 151 182 172
Equity contracts (including equity swaps, warrants
and options) ................................ 40 31 42 17
Commodity Contracts (including swaps, forwards,
and options) ................................ 39 51 67 60
--------------------------
Total ............................................$3,832 $3,652 $4,156 $3,535
------------------------------
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded futures contracts.
Assets included in the table above represent the Company's unrealized
gains, net of unrealized losses for which the Company has a master netting
agreement. Therefore, the fair value of assets related to derivative contracts
at May 31, 1996 represents the Company's net receivable for derivative financial
instruments before consideration of collateral. Included within this amount was
$4,465 million and $32 million, respectively, related to OTC and exchange-traded
contracts.
With respect to OTC contracts, the Company's views its net credit
exposure to be $3,066 million at May 31, 1996, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after consideration
of collateral of $1,399 million. Presented below is an analysis of the Company's
net credit exposure for OTC contracts based upon internal designations of
counterparty credit quality.
1996
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent
Exposure
1 AAA/Aaa 19%
2 AA-/Aa3 or higher 22%
3 A-/A3 or higher 45%
4 BBB-/Baa3 or higher 10%
5 BB-/Ba3 or higher 3%
6 B+/B1 or lower 1%
- - --------------------------------------------------------------------------------
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
The Company is also subject to credit risk related to its exchange
traded derivative contracts. Credit risk for exchange traded contracts differs
from OTC related contracts. The Company's credit exposure for OTC contracts
represents the unrealized gain from various counterparties for the duration of
the contract. Exchange traded contracts, including futures and options, are
transacted directly on the exchange. To protect against the potential for a
default, all exchange clearing houses impose net capital requirements for their
membership. Additionally, the exchange clearing house requires counterparties to
futures contracts to post margin upon the origination of the contract and for
any changes in the market value of the contract on a daily basis (certain
foreign exchanges extend settlement to three days).
Therefore, the potential for losses from exchange-traded products is limited.
5. Other Commitments and Contingencies:
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After considering
all relevant facts, available insurance coverage and the advice of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or results of operations.
As a leading global investment bank, risk is an inherent part of all of
the Company's businesses and activities. The extent to which the Company
properly and effectively identifies, assesses, monitors and manages each of the
various types of risks involved in its trading (including derivatives),
brokerage, and investment banking activities is critical to the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk, and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Note 15 to the Consolidated
Financial Statements, in the Form 10-K.
6. Related Party Transactions:
In the normal course of business, the Company engages in various
securities trading, investment banking and financing activities with Holdings
and many of its affiliates (the "Related Parties"). In addition, various
charges, such as compensation, occupancy, administration and computer processing
are allocated among the Related Parties, based upon specific identification and
allocation methods.
During the six months ended May 31, 1996, the Company paid $123 million
to Holdings as a return of capital.
7. Incentive Plans:
In June 1996, the Compensation and Benefits Committee of the Board of
Directors of Holdings (the "Compensation Committee") approved the 1996 Stock
Award Program (the "1996 Program"), pursuant to the Lehman Brothers Holdings
Inc. Employee Incentive Plan ("EIP"). Under the 1996 Program, eligible employees
of Holdings and the Company are to receive, subject to vesting provisions and
transfer restrictions, approximately five million restricted stock units
("RSUs"). These RSUs will vest 80% on July 1, 1997 and 20% on July 1, 2001.
Effective during the second quarter of 1996, a total of 20 million shares of
common stock may be subject to awards under the EIP. Through July 15, 1996,
approximately eleven million shares have been awarded, consisting of
approximately seven million RSUs for both the 1996 Program and for new
hires as part of Holdings and the Company's recruitment efforts 1.4 million
options granted in 1995 and approximately 2.7 million options granted in 1996
to certain senior officers. It is expected that the share requirements for
these awards will be met by repurchasing shares in the open market.
In addition, members of the Corporate Management Committee ("CMC") and
certain senior officers are eligible to receive RSUs based on the achievement of
1996 performance goals, with approximately one million RSUs expected to be
awarded in total under the 1996 Management Ownership Plan (the "1996 Plan") and
the EIP. The 1996 Plan was approved by shareholders of Holdings on April 10,
1996.
In the second quarter of 1996, Holdings granted approximately 0.8
million options under the 1996 Plan to members of the Corporate Management
Committee ("CMC") at an average market price on the dates of grant of $24.06
(the "1996 Options"). The 1996 Options become exercisable in four and one half
years and expire five years after grant date; exercisability is accelerated
ratably in one-third increments at such time as the closing price of the common
stock meets, or exceeds, $28.00, $30.00 and $32.00 for 30 consecutive trading
days. If a minimum target price is not reached and maintained for the specified
period in the four and one half year period following issuance, the award
recipients may then exercise all of their options thereafter. Also, in the
second quarter, Holdings granted approximately 2.7 million options under the EIP
to certain senior officers (which are included in the eleven million referred to
in the first paragraph of this footnote) at an average market price on the dates
of grant of $24.19, with provisions similar to the 1996 Options. No
compensation expense has been recognized for these stock options as all have
been issued at the market price of the common stock on the date of the
respective grant.
Also in the second quarter of 1996, Holdings awarded performance stock
units ("PSUs") under the 1996 Plan to members of the CMC and under the EIP to
certain senior officers as part of a four-year long-term incentive award. The
number of PSUs which may be earned, if any, is dependent upon achievement of
certain performance levels within a two-year period. At the end of the
performance period, any PSUs earned will convert one-for-one to RSUs which then
vest at the end of the fourth year. The compensation cost for the estimated
number of RSUs that may eventually become payable in satisfaction of PSUs is
accrued over the combined performance and vesting period and added to common
stock issuable.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The Company's principal business activities, investment banking and
securities trading and sales, are by their nature subject to volatility,
primarily due to changes in interest and foreign exchange rates, global economic
and political trends and industry competition. As a result, revenues and
earnings may vary significantly from quarter to quarter and from year to year.
The favorable market environment experienced during the second half of
1995 continued into 1996. The U.S. bond market continued to rally as
expectations for additional easing by the U.S. Federal Reserve Bank and the
possibility of a deficit reduction package positively impacted the industry as a
whole. Internationally, weakness in the major European economies produced a
round of interest rate cuts from a number of central banks in an effort to
promote stronger economic growth. These actions led to more positive market
conditions in Europe. The favorable worldwide trend in interest rates also
supported strong performance in global equity markets. All of these factors led
to continued strength in debt and equity underwriting volumes.
By mid February, 1996, investor concerns about stronger economic data,
raising the possibility of no further interest rate reductions by the U.S.
Federal Reserve Bank, caused a significant correction in the U.S. fixed income
market and a general increase in interest rates. Despite this change in interest
rates, the overall market environment in the second quarter remained reasonably
favorable. Investors were active in purchasing new issue products that offered a
spread to Treasuries, such as corporate, asset-backed and mortgage-backed bonds,
in order to achieve their performance benchmarks. The increase in investor
demand created a high level of customer volume in the U.S. debt market, while
strong customer demand and favorable spreads drove more issuers into the market,
resulting in an extremely high level of debt syndicate activity.
Late in the second quarter of 1996, the tone in the U.S. fixed income
market became decidedly more negative. Investors reflected the uncertainty of a
possible Federal Reserve tightening by becoming less active in general and more
defensive. Fixed income underwriting continued at a reasonable pace as issuers
accelerated financing in anticipation of
higher interest rates later in the year. The equity market, meanwhile, continued
to exhibit strength as positive cash flows into mutual funds provided a strong
underpinning for both trading and syndicate activity. Recent strength in the
U.S. economy has created a more volatile market environment in terms of
heightening inflationary expectations and a general increase in interest rates;
these factors may impact corporate profitability and equity valuations, going
forward.
The second quarter's record levels of merger and acquisition activity,
reflecting strategic purchases, restructurings, spin-offs and growth in
cross-border transactions continued into the third quarter. Transaction volumes
are expected to remain strong for the remainder of the year.
Note: Except for the historical information contained herein, the Business
Environment and Specific Business Activities and Transactions sections of
this Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements that discuss the
risks and uncertainties involved in the Company's business.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended May 31, 1996 and May 31, 1995
The Company reported net income of $55 million for the second quarter
ended May 31, 1996 and net income of less than $1 million for the second quarter
ended May 31, 1995. The improved results for 1996 reflect stronger earnings and
enhanced margins which resulted from the fifth consecutive quarter of higher
revenues, amid a period of generally improved market conditions.
Net revenues increased to $615 million for the second quarter of 1996
from $487 million for the second quarter of 1995 and $607 million for the first
quarter of 1996. The increase in net revenues reflected continued strengthening
in the Company's customer flow and trading activities in a number of fixed
income and equity product areas and improved investment banking results. The
increase in investment banking revenues over the second quarter of 1995
reflected a strengthening in underwriting volumes and improved corporate
finance advisory revenues.
As part of its market-making activities, the Company maintains
inventory positions of varying amounts across a broad range of financial
instruments which are marked-to-market on a daily basis and along with the
Company's proprietary trading positions, give rise to principal transactions
revenues. The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange rates and the
equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Net interest revenues were $63 million for
the second quarter of 1996 and $72 million for the second quarter of 1995. This
decrease was attributed to changes in the mix of the Company's assets and an
increase in interest bearing liabilities. Partially offsetting the decrease are
higher spreads on certain U.S. government matched book financing transactions.
<PAGE>
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into five major business units: Fixed Income, Equity, Corporate Finance
Advisory, Merchant Banking and Asset Management. Each business unit represents a
grouping of financial activities and products with similar characteristics.
These business activities result in revenues that are recognized in multiple
revenue categories contained in the Company's Consolidated Statement of
Operations. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
<TABLE>
<CAPTION>
Three Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income ..................................................... $ 319 $ 13 $ 68 $ 1 $ 401
Equity ........................................................... 37 60 60 1 158
Corporate Finance Advisory ....................................... 47 47
Merchant Banking ................................................. (5) 7 2
Asset Management ................................................. (1) 4 4 7
-----
$ 350 $ 77 $ 182 $ 6 $ 615
-----
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income ..................................................... $ 239 $ 23 $ 40 $ 8 $ 310
Equity ........................................................... 21 78 24 1 124
Corporate Finance Advisory ....................................... 36 36
Merchant Banking ................................................. (7) 12 5
Asset Management ................................................. 1 6 5 12
-----
$ 254 $ 107 $ 112 $ 14 $ 487
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net-worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include government securities, mortgage-
and asset-backed securities, money market products, dollar- and non-dollar
corporate debt securities, emerging market securities, municipal securities,
financing (global access to debt financing sources including repurchase and
reverse repurchase agreements), foreign exchange, commodities and fixed income
derivative products. Fixed income net revenues increased 29% to $401 million for
the second quarter of 1996 from $310 million for the second quarter of 1995.
Fixed income revenues improved versus the prior year quarter despite the
volatility that affected the fixed income markets for much of the quarter and
the significant rise in U.S. interest rates which saw a 83 basis point rise in
the two year treasury note and a 52 basis point rate increase on the 30 year
treasury bond. The improvement in the second quarter results over the prior year
reflected the stronger syndicate calendar in 1996 and improved customer flow and
net trading results (principal transactions and net interest) from a number of
fixed income products including mortgages, governments, emerging markets and
firm financing. Investment banking revenues, as a component of fixed income
revenues, increased to $68 million for 1996 from $40 million for 1995 due to a
strengthening in origination volumes and an improved mix of underwriting
revenues.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance and arbitrage activities. The Company's equity net
revenues increased 27% to $158 million for 1996 from $124 for 1995, reflecting
the favorable equity markets which saw record inflows of capital into mutual
funds, generally improved trading volumes on exchanges and favorable valuations
which continued to drive syndicate activities. Investment banking revenues, as a
component of equity revenues, increased to $60 million for 1996 from $24 million
for 1995 due to an increase in the number of lead and co-managed equity related
underwritings.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Operations as a component of
investment banking revenues, result primarily from fees earned by the Company in
its role as strategic advisor to its clients. This role primarily consists of
advising clients on mergers and acquisitions, divestitures, leveraged buyouts,
financial restructurings, and a variety of cross-border transactions. The net
revenues for corporate finance advisory were $47 million in 1996 and $36 million
in 1995. This increase reflected continued strength in the merger and
acquisition market environment. The Company ended the second quarter with a
strong transaction pipeline, which stood at $50 billion in terms of total
dollar value.
Merchant Banking. The Company is the general partner for four merchant
banking partnerships, including three institutional funds and one employee
investment vehicle. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies
diversified on a geographic and industry basis. At May 31, 1996 the Company's
investment in such merchant banking partnerships, for which the Company
acts as a general partner, was $91 million. There are no remaining
commitments to these partnerships.
Merchant banking net revenues primarily represent the Company's
proportionate share of net realized and net unrealized gains and losses from the
sale and revaluation of investments held by the partnerships. Such amounts are
classified in the Consolidated Statement of Operations as a component of
investment banking revenues. Merchant banking net revenues also reflect the
related net interest expense relating to the financing of the Company's
investment in the partnerships. Merchant banking revenues for the second quarter
of 1996 were $2 million versus $5 million for the second quarter of 1995,
reflecting a reduction in the net gains recognized on the publicly traded
investments held by the partnerships.
Asset Management. Revenues from asset management activities decreased
to $7 million for 1996 from $12 million for 1995. Asset Management revenues
primarily consist of fees from the management of various funds, commissions
from the sale of funds to customers and fees from the management of certain
accounts for institutions and high-net-worth individuals.
Non-Interest Expenses. Non-interest expenses were $520 million for the
second quarter of 1996 and $499 million for the second quarter of 1995.
Compensation and benefits expense was $303 million for the second quarter of
1996 and $267 million for the second quarter of 1995 consistent with higher
levels of business activities in the current year quarter.
Non-compensation and benefits expenses were $217 million for 1996 and
$232 million for 1995. Non-compensation and benefits expenses in 1996 and 1995
includes management fees of $20 million and $48 million, respectively, which
have been allocated by Holdings to the Company.
Income Taxes. For the second quarter of 1996, the Company's income tax
provision was $40 million on pretax earnings of $95 million, resulting in an
effective tax rate of 42%. For the second quarter of 1995, the Company reported
a tax benefit of $12 million on a pretax loss of $12 million. The effective tax
rates for these periods differ from the statutory U.S. federal income tax rate
as a result of state taxes and tax benefits attributable to income subject to
preferential treatment.
<PAGE>
Results of Operations
For the Six Months Ended May 31, 1996 and May 31, 1995
The Company reported net income of $100 million for the six months
ended May 31, 1996 and net income of $5 million for the six months ended May 31,
1995. The improved results for 1996 reflect stronger earnings and enhanced
margins, amid a period of generally improved market conditions.
Net revenues increased to $1,222 million for the six months of 1996
from $938 million for the six months of 1995. The increase in net revenues
reflected continued strengthening in the customer flow and trading activities in
a number of fixed income and equity product areas and improved investment
banking results. The increase in revenues from investment banking in 1996
reflected a significant strengthening in underwriting volumes and improved
corporate finance advisory revenues.
Net interest revenues were $130 million for the six months of 1996 and
$156 million for the six months of 1995. This decrease was attributed to changes
in the mix of the Company's assets and an increases in interest bearing
liabilities. Partially offsetting the decrease is an increase in the volume and
spreads on fixed income matched book transactions.
<TABLE>
<CAPTION>
Six Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income ............... $ 670 $ 30 $ 131 $ 4 $ 835
Equity ..................... 53 119 101 3 276
Corporate Finance Advisory . 87 87
Merchant Banking ........... (7) 15 8
Asset Management ........... 9 7 16
$ 716 $ 158 $ 334 $ 14 $1,222
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended May 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
<S> <C> <C> <C> <C> <C>
Fixed Income ................. $ 469 $ 46 $ 62 $ 10 $ 587
Equity ..................... 37 143 44 2 226
Corporate Finance Advisory . 75 75
Merchant Banking ........... (9) 40 31
Asset Management ........... (2) 11 10 19
------
$ 495 $ 200 $ 221 $ 22 $ 938
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Income. Fixed income net revenues increased 42% to $835 million
for the six months ended May 31, 1996 from $587 million for the six months ended
May 31, 1995. Fixed income revenues for 1996 were improved versus 1995 primarily
as a result of favorable market conditions which led to improved investment
banking results and greater contributions from customer flow and trading
activities in a number of fixed income products including governments,
mortgages, emerging markets and high grade corporate bonds. Investment banking
revenues, as a component of fixed income revenues, increased to $131 million
for 1996 from $62 million for 1995 due to a strengthening in origination
volumes and an improved mix of underwriting revenues.
Equity. The Company's equity net revenues increased 22% to $276 million
for 1996 from $226 for 1995. Investment banking revenues, as a component of
equity revenues, increased to $101 million for 1996 from $44 million for 1995
due to a stronger syndicate calendar which resulted in an increase in the number
of lead and co-managed equity related underwritings.
Corporate Finance Advisory. The net revenues for corporate finance
advisory were $87 million in 1996 and $75 million in 1995. The environment for
merger and acquisition activity during 1996 was strong as a result of heightened
industry and cross-border consolidation.
Merchant Banking. Merchant banking net revenues for the 1996 were $8
million versus $31 million for 1995, reflecting a reduction in the net gains
recognized on the publicly traded investments held by the partnerships.
Asset Management. Revenues from asset management activities decreased
to $16 million for 1996 from $19 million for 1995. These revenues primarily
consist of fees from the management of various funds, commissions from the sale
of funds to customers and fees from the management of certain accounts for
institutions and high-net-worth individuals.
Non-Interest Expenses. Non-interest expenses were $1,049 million for
the six months of 1996 and $948 million for the six months of 1995. Compensation
and benefits expense was $617 million for the 1996 and $447 million for the 1995
consistent with higher levels of business activities in the current year
quarter.
Non-compensation and benefits expenses were $432 million for 1996 and
$501 million for 1995. Non-compensation and benefits expenses in 1996 and 1995
includes management fees of $44 million and $100 million, respectively, which
have been allocated by Holdings to the Company.
Income Taxes. For the six months ended May 31, 1996, the Company's
income tax provision was $73 million on pretax earnings of $173 million,
resulting in an effective tax rate of 42%. For the six months of 1995, the
Company reported a tax benefit of $15 million on a pretax loss of $10 million.
The effective tax rate for these periods differ from the statutory U.S. federal
income tax rate as a result of state taxes and tax benefits attributable to
income subject to preferential treatment.
<PAGE>
Liquidity and Capital Resources
The Company's total assets increased to $98.8 billion at May 31, 1996 from $82.6
billion at November 30, 1995. The increase in total assets is primarily
attributable to an increase in financing activities in both fixed income and
equity, as well as an increase in government and agency positions.
The Company's balance sheet is highly liquid and consists primarily of cash and
cash equivalents, securities and other financial instruments owned which are
marked-to-market daily and collateralized short-term financing agreements. As
the Company's primary activities are based on customer flow transactions, the
Company experiences a rapid asset turnover rate. In addition, the highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The overall size of the Company's total assets and
liabilities fluctuates from time to time and at specific points in time (such as
calendar quarter ends) may be higher than fiscal quarter ends.
Funding and Capital Policies
The Firm's Finance Committee which includes senior officers from key areas of
the Company, is responsible for establishing and managing the funding and
liquidity policies of the Company. This includes recommendations for balance
sheet size as well as the allocation of balance sheet to product areas as
determined by internal profitability models and return on equity targets. The
primary goal of the Company's funding principles as set by the Finance Committee
are to provide sufficient liquidity and availability of funding sources
throughout all market environments.
As a policy, the Company attempts to maintain sufficient capital and funding to
finance itself on a fully secured basis, through its liquidity contingency plan.
This liquidity contingency plan meets the Company's funding requirements through
a combination of collateralized short-term financings and short-term secured
debt, as well as Total Capital, defined as long-term debt, including both senior
notes and subordinated indebtedness, plus stockholder's equity. To achieve this
objective, the Company's liquidity policies include maintaining sufficient
excess unencumbered securities to use as collateral to obtain secured financing,
if necessary, to meet maturities of short-term unsecured liabilities as well as
current maturities of long-term debt. Also, the Company maintains a sufficient
amount of Total Capital to enable the Company to fund those assets which are
less liquid.
The Company's liquidity contingency plans are continually reviewed and updated
as the Company's asset/liability mix and liquidity requirements change.
Additionally, the Company periodically tests its secured and unsecured credit
facilities to ensure availability and operational readiness. The Company's
liquidity and Total Capital policies are designed to ensure that the Company can
meet its funding needs over a wide range of economic, credit and market
environments. The Company met all liquidity and Total Capital policy
requirements at May 31, 1996.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Short-Term Funding
Each of the company's businesses is required to fund its products
primarily through global collateralized financings. There are two principal
business areas which are responsible for these efforts, Lehman Brothers'
Fixed Income Financing ("Financing") and Equity Finance. Financing works
in conjunction with the institutional fixed income sales and trading
professionals to provide financing to customers and the Company through the
repurchase markets. Equity Finance provides a similar function in the equity
markets typically through securities loaned/securities borrowed transactions.
The ability of the Company to leverage its global market expertise and
distribution capabilities are key to a successful financing effort. The
amount of the Company's collateralized borrowing activities will vary
reflecting changes in the mix and overall levels of securities and other
financial instruments owned and global market conditions. However, at
all times, the majority of the Company's assets are funded with
collateralized borrowing sources.
The Company's treasury area works closely with Financing and Equity Finance to
develop funding plans to support the business areas, as well as to execute daily
funding activities. On a daily basis, treasury is responsible for meeting any
funding needs not met through Financing and Equity Finance. Treasury funding is
managed globally through regional centers which have access to the capital
markets though the issuance of commercial paper as well as bank lines of credit
and other short- and long-term debt instruments.
At May 31, 1996 and at November 30, 1995, $70 billion and $56 billion,
respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources. The remainder of the financing for the balance
sheet was comprised of commercial paper and short-term debt, payables and Total
Capital. As of May 31, 1996 and November 30, 1995, commercial paper and
short-term debt was $4.8 billion and $1.0 billion, respectively. Of these
amounts, commercial paper outstanding at May 31, 1996 was $68 million with an
average maturity of 27 days. At November 30, 1995, there was no commercial paper
outstanding.
The Company maintains uncommitted lines of credit with a broad range of banks
and financial institutions from which it draws funds in a variety of currencies.
Uncommitted lines consist of facilities that the Company has been advised are
available but for which no contractual lending obligations exist.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total Capital
Long-term assets are financed with Total Capital. The Company maintains Total
Capital in excess of its long-term assets to provide additional liquidity, which
the Company uses to meet its short-term funding requirements and to reduce its
reliance on commercial paper and short-term debt.
At May 31, 1996 and November 30, 1995, Total Capital consisted of the following:
May 31, November 30,
Long-term debt: 1996 1995
-------------- ----------
Senior notes $ 272 $ 420
Subordinated indebtedness 3,594 3,077
----- -----
3,866 3,497
----- -----
Stockholder's equity:
Common equity 2,005 2,028
----- -----
Total Capital $5,871 $5,525
====== ======
During the six months ended May 31, 1996, the Company issued $775 million in
long-term debt, which was $368 million in excess of its maturing debt. These
issuances were primarily utilized to refinance current and prefund expected
maturities of long term debt in 1996.
At May 31, 1996, the Company had approximately $250 million available for
issuance of debt securities under various shelf registrations.
The Company's common stockholder's equity decreased by $23 million to $2,005
million at May 31, 1996 from $2,028 million at November 30, 1995 due to the
payment of dividends to Holdings partially offset by the retention of earnings.
Dependence on Credit Ratings
The Company, like other companies in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations. Access to
global capital markets for short-term financing, such as commercial paper and
short-term debt, senior notes and subordinated indebtedness are dependent on the
Company's short- and long-term debt ratings. The current short- and long-term
senior and subordinated ratings of the Company are as follows:
LBI
Short-term Long-term**
- - --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. D-1 A/A-
Fitch Investors Service Inc. F-1 A/A-
IBCA A1 A/A-
Moody's P2 A3*/Baa1
S&P + A-1 A+*/A
Thomson BankWatch TBW-1 A/A-
- - --------------------------------------------------------------------------------
* Provisional ratings on shelf registration
** Senior/subordinated
+ Long term ratings outlook revised to negative on September 21, 1994
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specific Business Activities and Transactions
The following sections include information on specific business
activities of the Company which affect overall liquidity and capital resources:
High Yield Securities. The Company underwrites, trades, invests and
makes markets in high yield corporate debt securities. The Company also
syndicates, trades and invests in loans to below investment grade companies. For
purposes of this discussion, high yield debt securities are defined as
securities or loans to companies rated as BB+ or lower, or equivalent ratings by
recognized credit rating agencies, as well as non-rated securities or loans
which, in the opinion of management, are non-investment grade. Non-investment
grade securities generally involve greater risks than investment grade
securities due to the issuer's creditworthiness and the liquidity of the market
for such securities. In addition, these issuers have higher levels of
indebtedness, resulting in an increased sensitivity to adverse economic
conditions. The Company recognizes these risks and aims to reduce market and
credit risk through the diversification of its products and counterparties. High
yield debt securities are carried at market value and unrealized gains or losses
for these securities are reflected in the Company's consolidated statement of
operations. The Company's portfolio of such securities at May 31, 1996 and
November 30, 1995 included long positions with an aggregate market value of
approximately $992 million and $940 million, respectively, and short positions
with an aggregate market value of approximately $208 million and $72 million,
respectively. The portfolio may from time to time contain concentrated holdings
of selected issues. The Company's largest high yield position was $100 million
and $47 million at May 31, 1996 and at November 30, 1995, respectively.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio, valued at
approximately $1.1 billion, to be accomplished substantially through
securitizations, asset sales and mortgage remittances. In 1995, the Company
purchased the partnership interest owned by Westinghouse and sold an additional
interest to an affiliate of Lennar Inc., (Lennar), a third party mortgage
servicer. Currently, the Company and Lennar hold 75% and 25% of the partnership,
respectively. Following the increase in ownership percentage, the partnership
has been consolidated in the Company's Statement of Financial Position. The
Company's net investment in the partnership at May 31, 1996 is $78 million. The
partnership expects to substantially liquidate the remaining real estate by the
end of 1996. The Company's original investment in the partnership was
approximately $136 million. The Company also advanced approximately $750 million
of financing to the partnership in 1993, which has subsequently been repaid in
its entirety from proceeds related to the disposition of the real estate assets.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Noncore Activities and Investments. In March 1990, the Company
discontinued the origination of limited partnership syndications (the assets of
which are primarily real estate) and investments in real estate. Currently,
Holdings and the Company act as a general partner for approximately $4 billion
of partnership investment capital and manage the remaining real estate
investment portfolio. At May 31, 1996, the Company had $26 million of
commitments and contingent liabilities under guarantees and credit
enhancements, net of applicable reserves. In certain circumstances, the Company
provides financial and other support and assistance to such investments to
maintain investment values. There is no contractual requirement that the
Company continue to provide this support.
Non-core activities and investments have declined 57% since November
30, 1995. Management's intention with regard to noncore assets is the prudent
liquidation of these investments as and when possible.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business. Such proceedings include actions brought against LBI
and others with respect to transactions in which LBI acted as an underwriter or
financial advisor, actions arising out of LBI's activities as a broker or dealer
in securities and commodities and actions brought on behalf of various classes
of claimants against many securities and commodities firms of which LBI is one.
Although there can be no assurance as to the ultimate outcome, the
Company has denied, or believes it has meritorious defenses and will deny,
liability in all significant cases pending against it including the matters
described below, and intends to defend vigorously each such case. Although there
can be no assurance as to the ultimate outcome, based on information currently
available and established reserves, the Company believes that the eventual
outcome of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on its business or
consolidated financial condition.
Actions Relating to First Capital Holdings Inc. (Reported in LBI's Annual
Report on Form 10-K and First Quarter Report on Form 10-Q)
At a hearing on June 24, 1996, the Court orally gave final approval to
the settlement of the American Express Shareholder Action and the American
Express Derivative Action.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc. (Reported in LBI's Annual Report on Form 10-K and First
Quarter Report on Form 10-Q)
LBI, together with the other defendants in Easton I and Easton II, has
agreed to settle both cases, subject to court approval.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company
(Reported in LBI's Annual Report on Form 10-K)
On June 24, 1996, the court granted the motion of LBCC and LBSF to file
an amended complaint naming CNM as an additional defendant.
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
12. Computation in Support of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS INC.
(Registrant)
Date: July 15, 1996 By /s/ Richard S. Fuld, Jr.
---------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1996 By /s/ Charles B. Hintz
-----------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- - ----------- -------
Exhibit 12. Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule
<PAGE>
Exhibit 12
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
For the For the For the
For the Year Eleven Months Twelve Months Six Months
Ended Ended Ended Ended
December 31, November 30, November 30, May 31,
-------------------------------------------- ------------ ------------ -------
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Interest expense:
Subordinated indebtedness ............ $ 231 $ 210 $ 192 $ 184 $ 204 $ 104
Bank loans and other
borrowings* ........................ 4,068 4,363 4,393 5,661 9,750 4,849
Interest component of rentals
of office and equipment ............ 64 64 62 27 25 9
Other adjustments** .................... 88 127 101 53 2 4
-------- -------- -------- -------- -------- --------
TOTAL (A) ............................ $ 4,451 $ 4,764 $ 4,748 $ 5,925 $ 9,981 $ 4,966
======== ======== ======== ======== ======== ========
Earnings:
Pre-tax income (loss) from
continuing operations ................ $ 283 $ 319 $ (146) $ 1 $ 78 $ 173
Fixed charges .......................... 4,451 4,764 4,748 5,925 9,981 4,966
Other adjustments*** ................... (69) (68) (68) (52) (1) (4)
-------- -------- -------- -------- -------- --------
TOTAL (B) ............................ $ 4,665 $ 5,015 $ 4,534 $ 5,874 $ 10,058 $ 5,135
======== ======== ======== ======== ======== ========
(B / A) .................................. 1.05 1.05 **** **** 1.01 1.03
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs,
amortization of capitalized interest and preferred stock dividends of a
wholly owned subsidiary.
*** Other adjustments include adding the net loss of affiliates accounted
for at equity whose debt is not guaranteed by the Company and
subtracting capitalized interest costs and undistributed net income of
affiliates accounted for at equity and preferred stock dividends of a
wholly owned subsidiary.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $214 million in 1993 and $51 million in 1994 in
order to cover the deficiencies.
<PAGE>
Exhibit 27
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN BROTHERS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at May 31, 1996 (Unaudited) and
the Consolidated Statement of Operations for the six months ended May 31, 1996
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 780
<RECEIVABLES> 14,537
<SECURITIES-RESALE> 32,104
<SECURITIES-BORROWED> 19,290
<INSTRUMENTS-OWNED> 31,380
<PP&E> 307
<TOTAL-ASSETS> 98,753
<SHORT-TERM> 4,776
<PAYABLES> 8,931
<REPOS-SOLD> 51,833
<SECURITIES-LOANED> 6,473
<INSTRUMENTS-SOLD> 11,520
<LONG-TERM> 3,866
<COMMON> 0
0
0
<OTHER-SE> 2,005
<TOTAL-LIABILITY-AND-EQUITY> 98,753
<TRADING-REVENUE> 586
<INTEREST-DIVIDENDS> 5,083
<COMMISSIONS> 158
<INVESTMENT-BANKING-REVENUES> 334
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 4,953
<COMPENSATION> 617
<INCOME-PRETAX> 173
<INCOME-PRE-EXTRAORDINARY> 100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
